Türkiye: CPI surprises to the downside in August, likely to be at 70% by year-end - BBVA

Inflation data in Türkiye came in below expectations in August with an increase of 1.46% in August. According to the Research Department at BBVA, stronger aggregate demand than supply, high cost push factors, recent utility price hikes and significantly deteriorated inflation expectations will lead to further acceleration in the Consumer Price Index despite recent easing in global commodity prices. Theys expect year-end consumer inflation at 70%, being supported by favorable base effects and assuming no further shocks to the exchange rate.

Key Quotes: 

“Consumer prices rose by 1.46% in August, once again below both market consensus and our expectation (2%), which led to an annual inflation of 80.2%. The downside surprise stemmed from a larger decline in energy prices and weaker food inflation.”

“The surprise in energy prices also led to a smaller increase (2.4% mom) in domestic producer prices compared to previous months and resulted in an annual inflation of 143.7%.”

“We envisage that without any clear coordination on both fiscal and monetary policies to fight against inflation, the time inconsistency problem would eventually lead to higher inflation figures than the official targets as we had repeatedly witnessed in the recent years. High inertia, particularly on backward indexation (such as wages and rents), worsened inflation expectations, loose economic policies, and swelling intervention and regulatory barriers will continue to keep upside risks on the inflation outlook.”

“Ongoing high external financing needs and strong dollarization fuel depreciation pressures, which result in higher production costs. Therefore, we forecast consumer inflation to be 70% at the end of this year and 33% at the end of 2023, with risks skewed to the upside.”